The London South East, Investing Matters Podcast, Episode 11, Edmund Shing, the Global Chief Investment Officer of BNP Paribas Wealth Management

LSE 00:01

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Peter Higgins 00:17

Hello and welcome to the London South East Investing Matters Podcast. My name is Peter Higgins and today I have the huge privilege of speaking with Edmund Shing. Edmund is the Global Chief Investment Officer of BNP Paribas, Wealth Management. BNP Paribas is the largest bank in the European Union or the leading bank, shall I say, as well and a key player in the international banking, it operates in 65 countries and has nearly 190,000 employees, including over 45 years or thereabouts, Edmund, so it's fantastic to have you with us.

Edmund Shing 00:57

My pleasure, Peter.

Peter Higgins 00:59

Yeah, you’ve got a lot of responsibility in lots of things use the words are kicking off at the moment.

Edmund Shing 01:03

Yeah, well, hey, just remember, Peter, I'm just a small cog in a very big wheel. So I think rule number one is to stay humble.

Peter Higgins 01:10

You're a very humble man. And I've spoken many times, and you are a large cog in a large organisation. So don't let's detract from that. Now, I wanted to start this conversation because we've got to go into some questions later on. And I want you to give people a heads up on a little bit about you, you've completed a degree in psychology at Oxford University, follow that up with a Master's degree in Artificial Intelligence was a good part of our conversation later on, at Sussex University. And then completed a doctorate in AI. Another part of our conversation later on, at the University of Birmingham was so you really are far ahead of, you know, a lot of people.

Edmund Shing 01:45

Don't be fooled. It sounds a lot better than it actually was honestly.

Peter Higgins 01:50

No, no, no. So you're a very learned individual, as far as I'm concerned, which is why it's brilliant to have a conversation with you again, as we've done a few years back. Now, I wanted to start our conversation with the fact that you started your illustrious investment industry career 1994. Now, in Goldman Sachs, and you've been travelling around the world ever since you know, your passport must be stamped so much.

Edmund Shing 02:14

Getting stamped more because of Brexit, actually,

Peter Higgins 02:15

That’s because people go frequent flyer by miles.

Edmund Shing 02:16

That's true.

Peter Higgins 02:19

So please, please can you tell us about your first role at Goldman Sachs? Go in there, you know, out of university, and pledging career? And what would you tell your younger self?

Edmund Shing 02:29

I'll try to remember was such a long time ago, Peter, come on.

But I mean, to give you sort of a potted version, you know, I was doing my PhD. But what I decided when I started my PhD back in whenever it was the early 90s, was I said to myself, look at Edmund, do you have a choice, you can either go into the job market, and maybe you remember, Peter, because you around that back in 1990/1991 was not the best of times in the UK economy.

It was pretty tough going big recession, interest rates 14%, house prices falling, you know, it's pretty dark days. So the graduate opportunities were not we're not actually that many, you know, companies, I remember them were pulling their graduate schemes left, right and centre, M&S for instance, Marks and Spencer, called a graduate scheme said, no, no, we're not taking any graduates this year, because, frankly, we have no clue what's going on.

So that was the context. And so I was lucky enough to do the Master's degree at Sussex, paid for by the British government, who in their wisdom had decided that we didn't have enough I.T. literate people and we needed to have a few more. And so that was very kind of them. So they funded that. And then subsequent to that, I enjoyed myself so much, I said to myself, look Edmund, you can either go into the job market, or you can give yourself the luxury of three years doing something you actually enjoy and find interesting, but with the proviso that at the end of the three years, you get into the real job market, you don't stay become a perpetual student.

So that's what I said to myself, I knew I had this notion there was a, there was an opportunity cost potentially, by not going to the job market sooner. But I thought, hey, this is a one time opportunity. Let's go for it.

So I did, and I went the opportunity cost. But as it drew to the end of those three years, I reminded myself, Edmund, remember, your three isn't nearly up to you. And I was never going to stand academia, never inability to be able to see Peter.

I did some teaching while I was doing my doctorate. And one thing I found that I don't like teaching, okay, I don't like teaching, I'm not very good at teaching. It requires a lot of patience. And unfortunately, I'm not as patient as I would like to be.

Funny enough, my wife is an excellent teacher, she has clearly a lot more patience than I do, at least with the kids. I mean, I discovered that I thought the academic career was not for me, good to get into the real world. And so my two choices, I figured were okay, let's do something.

I like research. It's great doing a doctorate, love research, let's do something to do with research.

But let's do something more applied where you can actually earn some money. And so I'd come up with three options one was doing into more pure research within the defence sphere.

Because I was living in Birmingham, I was actually living in a place called Malvern and then the foothills of the Malvern Hills, beautiful place. And there was what was called then the Defence Research Agency, which is now part of Qinetiq it's become Qinetiq's instead of privatised.

But it was then part of the Ministry of Defence, they're sort of far reaching research arm. And they offered me a job, actually to do with artificial intelligence going into running tank simulations using artificial intelligence to do battlefield simulations and to train future tank commanders and so on.

But I wasn't so keen on that. That sounded a bit. I sort of thought I stepped back and you know, I wouldn't read the motions did all the interviews, you know, they even investigated my family for the because of the Official Secrets Act.

So did a deep background, check all the rest of it. But when push came to shove, I thought, do I really want to do that? That's just not me. So I said, Look, be true to yourself. Don't do that do something else. And so the other two options were management, consultancy, or banking.

So, I applied for jobs in investment banking, research, and in management consultancy, but what I found very quickly doing interviews with management consultancies, I couldn't stand any of them, like the bain and co, the McKinsey is dreadful people. In fact, some of my best friends today are management consultants, but I do tell them, I love you as a friend, but your profession I regard with enormous cynicism, because I just think you're paid to tell people what they want to hear.

And then you charge them a fortune for it. So that wasn't me. And I couldn't do it. So I ended up in investment banking.

Luckily enough, Goldman Sachs in the wisdom or not, I don't know decided to take me on in London. Yeah, it was fantastic. They wanted someone who could do research, who was very I.T. literate, could do some programming. And so I sort of fit the bill. So I got lucky.

Basically, Peter, as always, you know matter how good you are in life, the one thing I figured out is you always need a good slice of luck. And yes, you could make the opportunities more likely to happen. But still, a little bit of luck is very important. So that's where I ended up at Goldman's.

Peter Higgins 06:35

And that's the first bit of luck. And, you know, I wouldn't say you've been lucky ever since. But you've done absolutely, phenomenally well, Edmund, you most certainly have made.

Edmund Shing 06:42

Ah, you know, I wouldn't go that far. Peter, I when I look back at my career, I would say I've done all right.

I've missed a lot of opportunities, like we all do. I've taken a few and I've missed a lot of really big opportunities. And I've made some very big mistakes, like we all do, as well. So I wouldn't go that far. I'd say being honest, I've done okay.

Obviously, I could have done a lot worse, but I definitely could have done a lot better as well. And that's what I've tried to tell my kids is that, you know, you have to be honest about these things.

Peter Higgins 07:07

So your current role is one of CIO essentially, isn't it not global chief investment officer? That's a big role for the wealth management arm is the asset under management for that aspect of BNP.

Edmund Shing 07:19

Good question, you know, changes all the time. But it's, it's well over 100 billion euros? How much more depends on the day, but you know, what, there you go.

Peter Higgins 07:27

So tell me about your role and what that involves? And what that means. So other people get an understanding of that?

Edmund Shing 07:33

Yeah, I mean, so what I tried to do is imagine the captain of a ship trying to set the direction of the ship. Okay, so you're trying to set the general direction of the investment ship?

Basically, that's the way I see it. And that can involve, obviously, looking at the macro economy. So you know, Are things going well, better or worse, in the macro economy? What's inflation doing? We know what it's doing at the moment. But, you know, is it a problem?

Is it not a problem, also, then burrowing down to the conclusion? So okay, that's all very well, the big picture. But what does the big picture mean? If I want to invest, if I'm a client wanting to invest, what does it mean? And then also, you have to consider things like, each client is very different.

So, we span in wealth management, we span the range from billionaires at the top end to what we would call the mass affluent, who have still a substantial money to spend, but maybe a working more people in their local bank branch, right. So it's an enormous range, and enormous range of needs and wants, from people who have a bit of money they want to save for the future or for the kids to people who have, frankly, more money than they know what to do with.

And of course, that's a very wide span of clients with a wide span of needs. So obviously, you can't just design a one size fits all approach, you have to be a lot more segmented. And so what we have to do is try to be sophisticated enough for the sophisticated investors.

But straightforward enough for the less sophisticated investors, and what we try to design an investment strategy and approach that can be adapted, depending on the type of client and the most important, the needs and desires of the client. Because that's what it comes down to. We are as all services businesses, a client-oriented business.

And so that's the starting point for us. So I tried to set the direction of the ship in general terms. So what does the macro economy tell us? What does inflation tell us? What does it mean for markets? So therefore, where should we be oriented?

We should we be biassed towards stocks or bonds or property or alternative assets? Because we can do all sorts of things. We can even do fine art. We could do farmland, we could do vineyards, we could you know this in wealth management. There's a whole range of alternative assets available not just the stocks, bonds, property and cash. But those are still the biggest building blocks, but they're not the only ones by any means.

Peter Higgins 09:38

Yeah, it's important to have the diversification of the note here. You've taken me seamlessly to the next phase of my question in here. And it's essentially with regards to the BNP Paribas or themes and investment themes of 2020 which I'm sure you had a very big decision making process on and evolving that.

Could you tell us a little bit about those I wanted to start firstly, obviously we're in this round rising period of inflation and one of the themes that you had was riding in a new inflation regime. And just talk us a little bit about that about the possibilities and the opportunities regarding that?

Edmund Shing 10:11

What their opportunities and costs, obviously, like with everything. So, you know, the problem is Peter, we've been used, obviously, in the last basically 20 years. And in fact, you might even say 40 years, but let's just say 20 years from now, of declining, and I would say in a scenario or regime, which was what I call lowflation, right, which is, you just didn't worry about it anymore.

It wasn't like the bad old 70s or the early 80s, where inflation rates were ridiculously high. And for central banks to squeeze the life out of the economy to get inflation rates down to something reasonable, you know, we left that behind us a long time ago. So since a tech bust of 2000-2002, we've been in increasingly lowflation, where inflation in the developed world really wasn't something to worry about, it was only something to worry about, if you're in emerging markets, really, of course, since the arrival of COVID, that has changed dramatically, since the beginning of 2020.

We are back into an inflation regime where you do have to worry about inflation, where the volatile not only the rate has risen, but the volatility has risen. And that's, I think, the key point, because all of the precepts and all the way you might have designed your asset allocation, your diversified portfolio, with the assumption of a lowflation environment, you have to chuck a lot of that out of the window, because we've changed inflation regime. And that is a huge deal.

When it comes to designing an investment portfolio. And doing asset allocation inside that portfolio, it makes a massive difference.

To give you an example, our strongest conviction today is that you need to be invested in some format in commodities or commodity exposure. Because when you look back at inflation regimes of the past, when you had high and rising inflation and high inflation, volatility, commodities, were the best way to hedge yourself, they were the best way to ensure that you actually can make some money inside your portfolio, because they are the asset class that did best during that period.

Now, obviously, up until 2020. In fact, from 2008, until 2020, commodities have been an extremely ugly place to be so the exact opposite. In fact, the best thing that an investor could have done was just ignore, forget the fact that that existed as an asset, let's just pretend it didn't exist, you didn't even think about it didn't exist, that's all changed, that is all changed, because we're back to an inflation regime, which is obviously well above 2%.

And even if we get down somewhere near the 2%, in the next year, two years, the chances are volatility will be higher for a number of structural reasons. And the structural reasons will include the race to renewable energy, right. And that's only being accelerated, of course, today, by everything happening in Eastern Europe, the fact that oil prices, gas prices have skyrocketed, which has then reinforced the need in the developed world and in the developing world for us to push ourselves towards zero, or at least a low carbon economy and get away from our reliance on fossil fuels. So today, we have that not only the climate challenge, you can add to that, of course, the political aspects, which are, we don't really want to rely on anything that comes out of Russia, there we go. So it's only going to accelerate that.

But let's not make any mistake, this trend was in place well, before the current crisis. This has been in place all through 2021. And I think it's going to last years, not a year or two, but years. And that's the sort of megatrend I like, because it's something we can talk to our clients about. And we can continue to talk to our clients about we can say, we don't deal in trades or tactical ideas, because you know, we don't want to be moving our clients in and out of assets or investments all the time, we want them to stay roughly with similar assets, similar lessons for a long time.

And so that's why we put the focus on these investment themes that have a long shelf life. And, you know, this shift in inflation regime, and our conviction towards commodities as a result of that is one such mega trend that we are playing at the moment.

Peter Higgins 13:53

On that note, it seems to have coincided with the inflation going up, obviously, that what are the themes going around at the moment is obviously and you've touched on it there, the metals commodity supercycle so for you, and your team. How are you best playing this in the sense of is it going to be ETFs? Is it individual commodity plays? Or is it actually in the actual metal exchange? Where's the best places and the beneficiaries of this?

Edmund Shing 14:19

Well, again, I think we still like the benefits of diversification. We have to bear in mind that commodities as an asset class, are very volatile. Yeah, individual commodities are very volatile. So diversification within that is incredibly important.

Don't just put all your money on oil or on copper on any single commodity, because you're going to be subject to an awful lot of volatility. And most investors don't like volatility. It takes an awful lot of experience to get used to volatility and for it not to bother you too much taken me an awfully long time to get used to that. Yeah, because psychologically, we are built to prefer stability.

And we don't like uncertainty. No one likes and so things certainly financial markets definitely do not like uncertainty. So we definitely do, so we prefer funds and ETFs. One point we had BNP and not allowed as a company policy to invest in commodity futures regarding agriculture. Because you know, the idea being, we don't want to profit from other people's misery, right?

Because you think about it when wheat and corn prices go up as they're about to because of obviously, the issues around Russia and Ukraine, we don't want to be seen to be profiting off that because people go hungry.

That's a serious, that's an enormous social issue, particularly in emerging markets. We don't want to be the other side of that. Okay. It's very simple. So we focus very much on the energy in the metals, commodities, and basically ignore the agricultural commodities from this point of view. But for us, there's plenty to play, energy already has gone skyward. So our focus, we were positive on energy exposure.

Now, we're probably more positive on industrial and precious metal exposure. You know, coming back to this idea, the long-term mega trend. Well, of course, one of those drivers is, of course, the fact that we need to move we need to transition faster than ever before towards a low carbon economy, whether it be electric cars, solar panels, wind power, the renewable energy storage infrastructure at night, like industrial sized batteries to store the power so that when the wind doesn't blow, and the sun doesn't shine, we still have electricity.

All of that requires guess what? tonnes and tonnes and tonnes of industrial metals copper, lithium, aluminium, tin, nickel and so on.

Right, yeah, a lot of these. And it's no coincidence, then that these have gone rocketed skywards, partly because some of them are supplied by Russia. But even before that, it was the case for the simple reason that we've had a 10 year bear market and commodity prices, companies adapt. And those mining companies have adapted basically, by cutting costs by keeping investment to a minimum, so you've not seen any new mines.

So the problem then comes when demand shoots skywards as it is now, because of this, need to transition to the low carbon economy, to electrify our economy, guess what the supply growth, discipline cannot, cannot grow quickly enough, because there is a huge lag effect.

You know, think about it to build a new mine means a you've got to commit the money being you've got to find the mine, you've got to find the potential side, do all your geological surveys and say this is promising.

Thirdly, you then got to negotiate with whichever country whichever government owns that site, because it's not necessarily going to be in a safe jurisdiction may be in the Democratic Republic of Congo, or I mean, who knows where it's in all sorts of places.

But unfortunately, often the best commodity resources are found in regimes and the countries are not very keen on that is unfortunately, the way it is with commodity markets.

And so there is a long lag effect between taking the decision at a company level to invest in new mines, and actually building the new mine and actually having it produce something produce extra output. It may be to five years or even more, sometimes a decade.

So we know that on the supply side, if you say demand versus supply, we know demands going up. And you know if anything's going up even faster because of what's happening. And we know supply cannot react quickly enough. So what happens, the price has to adjust.

That's exactly what's happening. And then of course, the corollary of that is that those commodity producers that are producing these metals and refining these metals, are sitting on amazing profit margins and amazing cash flows, because obviously, their cost of production doesn't go up very fast, a little bit maybe because of energy costs, but not that fast. But their gross margins are exploding, because of just the way that the finals metals prices are going up.

Peter Higgins 18:15

You've touched on the net zero side there and the decarbonisation a massive influx of ESG investing has been taking place over the past few years. And that's obviously a very, very growing theme. Everyone's talking about sustainability as well.

How is it best to inform and acknowledge these investors to make sure that they're actually investing exactly how they want to find out that some companies aren't as ethical as they, as they claim to be? There's a lot of greenwashing going on. So how would BNP and yourself doing that?

Edmund Shing 18:43

Yeah, I mean, I feel sorry for the final investor, because they've been offered a panoply, I mean, a myriad of investment opportunities with a label sustainable or ESG, or, you know, stamped on it. And the final investor as a very, very difficult job or virtually impossible job of figuring out, is this just greenwashing? Is it just marketing? Or are they actually doing what they say on the tin? Is it like Cuprinol, we do what we say on the tin. That's our job. It's our job as stewards of that capital, together with our partners, for instance, of BNP Asset Management, to go and talk to the companies and dig out the data, not just to get the data, but go engage with the companies and say, look, what are you doing?

Because there are some difficult issues here because, you know, we say ESG, and we say we want to be sustainable, and we want to transition to a low carbon economy.

Well, you know, building mines isn't necessarily the best activity in the world. But from an ESG point of view, I get we need the metals, so we can't transition to a low carbon economy without it. Having said that, just digging massive holes in the ground and exposing people potentially to a lot of danger when they work underground. It's not great.

So where you have to work with the companies is to say okay, what are you doing to mitigate all of this? How are you helping the local community? How are you improving safety for the mining employees to make sure the least number of accidents or lethal accidents in particular are kept to an absolute minimum? How are you enforcing the safety standards or even enhancing The safety standards, how are you recycling the water use? Are you using solar panels to generate renewable energy which you use to drive your mining operate?

Yeah, they're all these complicated questions. And I mean, I take mining companies as an example. But this applies to any company.

This applies to any company, we have to ask those questions and get your honest and detailed answers. And it's yeah, it's a lot of due diligence.

And it's a real pain, because it would be so much better if companies could just be honest and tell us, but the problem is Peter, there are no official global standards, like accounting standards for sustainable data. So companies can almost say what they like in their reports say, yeah, we're all doing this, that the other, that there are no standards of reporting, everything looks a bit different.

Or they may report on one aspect, but ignore other aspects where maybe they're not. So they may highlight the bit where they're good. Like, you're socially responsible, they may go on governance, where they're not so good, they might sort of quietly not say much about it.

And so what we really could do with our and this is obviously being worked on at a global level, as well as a European level is having some standards for reporting on sustainable characteristics and sustainable data so that we can compare apples to apples when looking at one company's sustainability versus another. Because at the moment, it's really hard. We try. But to be honest, it's not easy.

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Peter Higgins 21:33

One of your other themes is small is beautiful, or still is beautiful. So I wanted to touch on that. So as a private investor, also one of your passions is investing in small caps.

So our BNP Paribas preparing that and given that to investors globally, depending on what wealth we've got, and also regards to the rotation, we're seeing from, you know, significant growth, highly valued, richly valued stocks, small cap and value stocks. How is that going? And how do you see that going forward?

Edmund Shing 22:01

Yeah, well, I think the starting point is just as a structurally speaking, over the long-term, let's say the last 20-25 years, pretty much in any economy in any major stock market, you'd like to look at smaller mid-caps have outperformed large-caps over the period. And by a long way, not by little bit, but by lots generally, when you look at the US, UK, European Union, China, emerging markets, it's true that it's a trend that repeats itself time and time again.

So it's not, you know, it's not something you have to cherry pick the period, you have to cherry pick the region. No, it's it's pretty universal. And I would argue that is because companies often smaller cap companies have several characteristics that are interesting.

Firstly, they tend to be more focused and niche. So they tend to do what they do well, and don't try to over diversify. They're not at that point in their cycle. So they're earlier often in their growth cycle, or they deliberately focus on a niche where they know they can be better than the competition.

Secondly, they tend to be more domestically focused. So they don't try to be all things to all people globally, they focus on one or two or three key markets, their home markets, which they know in great detail, and where they have established distribution networks and marketing and so on. So they really are focused. And I think that's important.

Because the difficulty when you get to being a bigger and bigger company is just that problem of scale. You know, your shareholders are telling you we want you to grow. Without there comes a point where maybe you can't grow in your existing geographies, like Walmart, you know, Walmart, you get to such a size you are everywhere in the US and Canada.

What do you do next? Well, you tried to go overseas, but going overseas is a risk as Marks and Spencers, an example is found every time they've gone to the US, they basically become a cropper time and time again, UK banks the same story, there's huge risk, because things are different. consumer habits may be different, the culture is different.

Regulations are different, lots of things are different. And so smaller companies sidestep a lot of those issues by them with what they know what they know best, and just maximising their exposure in those specific regions or with a specific niches or products. So that's, I think, why small-caps do better over the long-term.

However, there is also the issue of liquidity. And I do think, you know, let's be honest, as you will know, Peter, because you're like me, you invest a lot in small-caps. There is the issue of illiquidity that, yes, you may be stuck with a share that you bought for a long time, because there just isn't liquidity to get out in size. And that's always a problem. And that's the trade off, right, you may get a better long-term performance, but don't expect to be able to bail out at any particular moment, because the liquidity may not be there, particularly in small-caps.

So the way we deal with that is to obviously propose funds and funds which are well diversified, so that they can cope with this, they're not taking a huge bet in any one company. Because, obviously, ideally, we all know that diversification in a stock fund does not require really more than 15 or 20 stocks, academically speaking, but realistically, 15 or 20, small-caps is not going to be a lot if you have a big fund, you just cannot get enough money into those stocks, or rather, even if you get the money in, you can't be sure of being able to get the money out at a decent time without having to take a massive discount on the prevailing price.

So that's why you end up with a much more diversified portfolio, 100 stocks, 150 stocks even because that way you get better liquidity overall over the entirety of your portfolio. And I think that's very important. And we all know as well, that when you analyse stock performance over a long, long period, like 20-25 years, that only a very small number of stocks contribute a massive percentage of the return of the overall index fund, right, even the S&P 500 or the FTSE 100 it's the same time and time again, the problem is, are you sure you're that good a stock picker? I mean, you are, I know your results. And I know you are. But I know you're very honest and humble about it. 

But most people are not in that position, they've not got the experience, or the talents, or do the due diligence necessary to be able to take those types of bets over the long-term, and probably don't have the patience, to be honest with you, either to wait, sit on their hands when necessary.

Because you know, Samuelson, the Nobel Laureate in economics once said, "investing should be about as interesting as watching paint dry."

It's a very difficult lesson to learn. You've learned it, as you know, it's difficult. And it's taken me I'm getting there. But it's taken me an awfully long time to get there. Honestly, on a personal basis.

Peter Higgins 26:09

Yeah, it's very difficult. And we'll talk about the psychology aspects of it a bit later on. But I wanted to stay on the theme of small caps, if you can just go back to that. And small cap investing is very, very difficult.

We've got our Investing Matters listeners that are going to be listening to this podcast, there's several amber and red flags that you will see regarding certain stocks, and you're looking out for these to ensure that you avoid investing traps and serial perennial disappointed and lifestyle companies. Could you just share with us Edmund, some of the ones that you're looking out for? And would you go, I'm staying well away from that one?

Edmund Shing 26:42

Okay, there's a whole there's a long list.

So first of all, I have to be honest, the first one is what I would call today, what would be called meme stocks, right? Fashionable stocks, you could have taken, for instance, the example of items like what we're using that Zoom communications, which as you know, after IPO in the US went up zillions of percent, I can't remember how many, but it was, it went in multiplied many, many times.

And it's come down crashing down to earth, it's a real bubble and bust story during the lockdown bubble. And now we're in the reopening phase of the economy's more of a bust. The problem is that as a retail investor, you tend to buy too late in that cycle, you tend to buy to near the top. And so the chances of that phenomenal rise, continuing ad infinitum is close to zero, the chance of it, retracing at least an enormous part of the run up is pretty high. And yet, we get suckered in.

So the first thing as a retail investor to ask yourself, Is this a fashionable meme stock? Is it one that's being talked about all the time on Twitter, on the news on the bulletin boards, and if it is, as you will know, maybe best to avoid it.

Secondly, I tend to stick to profitable companies, not always, there can be exceptions. But for the vast majority of investors, the best thing you can do is no by loss making companies, because yes, they may be the next Amazon or the next Microsoft, but they almost certainly will not be because there is only one Amazon and there is only one Microsoft, but I don't see competitors coming to overtake them from on a daily basis. We love the narrative, or finding the next Amazon or Microsoft. But the reality is, you can statistically speaking, bias things in your favour by buying profit making companies companies that are already making profits and profits that are growing.

So if you stick to companies that are making profits and profits that are growing over time, maybe you know, I'm not saying they have to grow every single year in a nice straight line, because that very rarely happens, right?

But you know, companies over a period of five years are growing top line and bottom line profits as well as sales, that's probably a good place to start and stay away from perennially loss making companies because as you say, they always promised jam tomorrow.

But the jam today never seems to arrive. And the third area is a balance sheet story. It's like beware of companies with very high debt. Because clearly that is a very significant risk. That if the business turns out or even if the economy turns down, it may be basically curtains for the company, they may not be able to survive the recession and make it through to the ensuing recovery.

In the recession, things might get so bad, they just go bust they go under and then you lose 100% of your money because it's a bankrupt stock. So those are three red flags. I would think there is a fourth one, which is a little bit more controversial.

If you look at a company, and either the Chief Executive Officer the or the the chief financial officer is a former investment banker or a former management consultant. I would say stick because they talk a good game. What is controversial is controversial, because I mean, occasionally they can be very good, but more often not they talk a good game, but operationally they're never as good as their marketing.

Peter Higgins 29:44

Haven't heard that one before. Thank you for sharing that with me. Now you've touched on something there, which I was going to talk about. And now we saw that all the way through the latter part of 2020 and 2021.

And it was this FOMO investing this fear of missing out. He talked about meme stocks before and it seemed to me Who was chasing all these all and everything up? And it was a case of a missing out and I've got to get on everyone else is talking about it and buying it. And now all those well, not all of them, but a significant amount of them just come back to mean averages.

How does somebody combat that? Because I think that's one of the weaknesses of private investors, including myself at times, buying stuff when they've already gone off and going, Oh, I should get in there because everyone else has done it?

Edmund Shing 30:23

Well, as I said, I mean, the most important thing, if we go to back to basics, the most important thing for a private investor is firstly, you need to decide, are you going to invest in single stocks, principally, why you can invest in funds and ETFs.

Principally, honestly, for the vast majority investors. As you all know, the best solution is funds and ETFs, you get the diversification, if you buy ETFs, you have low cost, so you don't have to worry about transaction costs.

The beauty of this as well is that you can even pound cost averaging, you can buy a little bit of these funds every month.

So you're not trying to time the market. And of course, if you buy the same amount of whichever fund every month, it is you will pick sometimes by a good time, sometimes by a bad time, but overall, you'll be buying at an average time, neither good nor bad, right.

And what you're basically playing is the overall long-term power of compounding. That's important. And that's one way to avoid it.

Now, it sounds incredibly boring. And by the way it is, but that is by design, because most people in their investments would be better off taking a very simple approach like that and going with someone like a Vanguard or someone similar.

And then going off and living their lives, go play golf, go enjoy whatever it is you enjoy. Don't spend your life if it's not your passion. Don't spend your life obsessing about it. Because that way lies madness, frankly, now, for you and me, it's a passion.

So it's different. We're happy to wear the volatility, we're happier, maybe not happy, but we're prepared to wear the volatility, we prepared to be patient. And then I think the second point is you need a system. Whatever system it is, you have a very fundamental system and you had a bit of technical, I believe that's the right way to go to marry fundamental analysis of a company's prospects over the long-term, and the industries they're in and so on.

With technical analysis of charts, I think, technical analysis of jobs gives us some aspect of mass psychology, it tells us what the market is thinking as an aggregate about, again, stock market about a stock or about a sector. And that is valuable information to add to the fundamentals, particularly for timing purposes.

But the most important thing is once you've settled on whatever strategy or system it is, and there are many that work, from deep value to momentum investing and everything in between, there's no one size fits all different strategies can work.

But the common element is well, there's two common elements, patients and most importantly, discipline, whatever strategy it is, there will be times when you know, it doesn't work. I mean, my God, it's happened to me so many times. And you just got to close your eyes and tell yourself, it's going to work, I need to be patient. Every strategy has its downtime, Warren Buffett, the most successful investors in the world have had poor performance periods, periods, they've stuck with the system, they weathered the period.

And in the long run, they become massively successful. And the biggest downfall of your average investor is exactly that lack of patience and lack of discipline together. That's it.

Peter Higgins 33:06

Brilliant reply. And you've actually answered my next question, almost, I've got it here is strong discipline and psychological resilience are prerequisites for successful long-term investing, admittedly, as a leader and a mentor, how have you nurtured that in others? And how can private investors replicate this going forward?

Edmund Shing 33:22

So the way I start, I always say, charity begins at home, I know you're a very big charity, charity for me begins at home, I have four children. I'm trying to teach my four children this, I am trying to teach my four children to avoid all the mistakes that I've made over the years, trying to give a shortcut, give them a better chances of success, and try to avoid, they went avoid all of the pain because we all make mistakes.

I mean, I'll give you the example of my eldest son, who I told time and time again, do not get involved with cryptocurrency. But he insisted on putting some money into Bitcoin. And guess what, he didn't quite lose his shirt. But he endured a little bit of volatility and a bit of a painful experience, shall we say? So he's learned from that he's learned from that.

So what I tried to do is instill these lessons, first and foremost into my children. Because I want them to carry these lessons forward. So when I'm not around anymore, they know what to do. They can benefit, they can learn and they can be better invested in me, that's my greatest wish is that they tend to be a far better invested need than I ever could be.

Because they're smart enough, they're talented enough. But as we come back to discipline, and the patience of things that maybe you find difficult when you're young, we all find difficult, but hopefully, I'll be helping them to find a shortcut to that. And other than that, for my clients, exactly the same repeating, it's a lot of education, a lot of education.

I try to educate our clients into exactly these principles, and then explain so we talk about diversification. We talk about patients, we talk about maintaining the same strategy. We talked about focusing on the long-term, not focusing too much on the short-term, and on the new slow off today, because it's very easy, especially with the internet Today with smartphones, all the information at our fingertips is actually I think, in many ways a disadvantage, because there's too much noise, too much chatter. And we're triggered too, emotionally to do too many things that we would regret in the long-term.

Peter Higgins 35:12

Absolutely, I think there's a big fault. And the research is gonna show when eventually all comes out, that this walking around with this little mini supercomputer in our pockets is causing people to react to look at the screens far too often. And therefore, we end up creating activity and churning out portfolios. And the previous research that we've that's been seen is that the best investors are the ones that I forgotten that they actually have an account and investment account portfolio.

Edmund Shing 35:34

That's the classic Fidelity study absolute for all that with dead accounts that never closed.

Peter Higgins 35:42

Absolutely. Now one of the themes that you've also got in your theme for 2020 For BNP Paribas, or is the one that everyone is talking about at the moment is entered the metaverse.

Now, one of the things that happened this year, and the previous year as well, Alphabet owner, Google basically decided they were going to change the privacy situation regarding advertising. Now they generated 61 billion in the last quarter in advertising revenue. However, the recently dropped that bombshell in the ecosystem. And it was gone. All right, a matter of moving into Meta/Facebook moving into the Metaverse and their earmarks of losing 10 billion without these privacy changes, which may happen in the next 10 years. So how does that impact the metaverse and who are going to be the winners and beneficiaries of the Metaverse going forward given the theme that you guys are running this year?

Edmund Shing 36:31

Well, I think that's important, as you say, to try to identify who are the gatekeepers to the Metaverse and as you've mentioned, Apple and Google are two of the key gatekeepers in the Metaverse and Meta has come a cropper.

Because of that. They've seen some of their advertising revenue dropped because they've been excluded to some extent, and not been able to harbour some of the data because of this, the harms privacy that's been put in place by Google and Apple.

And do you know, honestly, that's a good thing. No one likes giving that information away for free. And I think it's about time, we started to tighten up on these privacy regulations. But I think it goes further than that, in the sense that it's always difficult to identify the long-term winners because as you know, Peter, technology evolves so so quickly, and even more than in other sectors, you can see new leaders emerging overnight, like Zoom, who ever predicted Zoom, would actually outplay, at least initially, Microsoft in the video communication business, yeah, Microsoft had Skype.

Yeah, they bought Skype years and years ago. So they had a massive technological lead. And then, of course, the develop teams on top of that for collaborative software, which, of course, is very much about video conversations.

And yet, Zoom managed to come from nowhere, with an amazing, amazingly simple interface. And you serve that technological lead that functions are built over years and years, years. So it just shows you I mean, just remember Nokia, I always remember that story, Nokia 44% of global mobile phone sales at one point, I mean, they were the market. And where are they today?

Yes, zero, and Blackberry, the same. In the corporate phone market, they were massive. Where are they zero? It just changes so quickly. And it's difficult to predict.

Which is why, again, more than in other sectors, diversification among several sub themes is very important when playing this theme.

So that's why yes, of course, we like to look at the likes of the established players like Google and Apple. But you've got to take a much greater diversified look at the plumbing of the metaverse, what is likely to be in the infrastructure. And so that's where we look at things like cybersecurity or E-payments, it may be less sexy.

But part of the metaverse is going to be of course, transacting electronically, like we do with online purchases at the moment, it's developing that even further, and who are going to be the winners from that cybersecurity is going be so important.

Because if you're transacting over the internet, you don't want your your virtual identity being stolen, you want it protected. So digital privacy with cybersecurity is going to become even more important. And again, with all that's going on in Eastern Europe, that's just come back to the four that you know, phishing attacks, or denial of service attacks, DDoS attacks, all of this, at a corporate level, as well as at a personal level is incredibly important.

So we're focusing a lot of these sub segments, as well as on the obvious names. And obviously, we're trying to keep a close eye on emerging segments, like, you know, for instance, within virtual reality, or the applications of artificial intelligence, and machine learning to see okay, how does that fit?

Who are the players, they're not just the established players like Google, but who the up and coming players meet, where you may want an exposure. And in a sense, that's why it's quite interesting because sometimes, you would even argue that you would need to have some exposure maybe to growth, private equity, not just the public equity, because in some ways, the only way to get a diversified exposure to some of the promising growth names in the tech space these days is by private equity because by the time their IPO comes to the market, they already like Uber or Zoom, they already effectively massive companies, and you've missed out on that sort of the earlier growth stages because they stay private.

So again, it's a tough one. But it is something I think that many investors would do well to consider having some even small exposure to this sort of growth private equity area. And you can do that, of course, as we know, via listed private equity. If you look at the on the Investment Trust website, The AIC’S website, there are a number of very promising Investment Trusts involved in exactly the listed private equity space that to focus on all of these growth technology companies.

Peter Higgins 40:25

Yeah, and as you said, enables that diversification without having to pick one particular entity, you pick the phone, or the private equity vehicle. Now Edmund, I know from our previous conversations that you're travelling backwards and forwards to France.

Edmund Shing 40:39

Not anymore. Not anymore.

Peter Higgins 40:43

I will carry on with my question anyway. So nothing more, but you've always used to have a diversification in your portfolio regarding FX regarding Euros, Dollars and Sterling, etc. are you still doing that? And how have you navigated that recently, given the absolute volatility we've had?

Edmund Shing 41:01

Oh, very much. So it's true. But again, let's go back to the beginning the fundamentals, which are if you're a long-term investor, should you really care about FX and FX hedging?

Actually, the answer is more often not no. Over the long-term, because it swings around, I would say it swings and roundabouts, you get periods of, you know, the Pound or the Dollar or the Euro being strong, and then periods of being weak.

But on a 10 year period, you know, it sort of washes out more often than not. So I tend to go with my strongest convictions first at an investment level at a thematic level.

For instance, at the moment, precious metals, as I said, industrial metals in stock form. Nuclear, for instance, is another area I really like, yeah, these are long-term themes, you will inevitably be dragged into certain jurisdictions, whether you like it or not. So for instance, if you want to invest in, I don't know, silver mining companies, you do end up being a lot in Canada, for instance. Now, that means I've got Canadian dollar exposure?

Well, I do. I didn't necessarily design it that way. But I want exposure to that theme to these companies, because I believe this to be incredibly promising. And so just by default, I have to have Canadian Dollar exposure, do I hedge it out?

Not really. But what I do hedge out all my daily, weekly monthly expenses. So as you said, when I was going backwards and forwards, I would always have to be very careful to have sufficient number of pounds and euros because, you know, on a daily monthly basis, I needed them.

And that would be something I would watch. So that's something I would maybe you know, just for risk management purposes, I would the pound was particularly weak, then I you know, I'd be taking yours putting them into pounds, if the, if the Euro was weak, then I'd end up doing the opposite on the basis that you know, I need to stock or both over time. And so when one is weak, I take advantage a bit like a value investor, buy it when it's low on the basis that reversion to me will happen sooner or later. And you know, I need it. I know I'll need some for spent just spending purposes sooner or later.

Otherwise, I don't tend to hedge that much. Because as long as I've got a diversified, as you say, diversified portfolio. So in my portfolio, I've got Canadian Dollar exposure, US Dollar exposure, Pound Euro, bit of everything exposure. So it's pretty well diversified on that basis. But I do think that the one thing you have to think about is where are you going to end up when you want to spend all this money that you've invested? Right? What are you going to spend it? Are you going to be the UK? Are you going to Europe? Are you going to be somewhere else? Because that is a consideration, maybe not not now, when you're investing and hopefully building a portfolio. But when it comes to maybe spending the fruits of your gains, then maybe FX does become important. Because if you're in the UK, and you'll need pounds, if you're in the Euro Zone, you will definitely need Euros and so on and so forth. So there is that consideration, I think but that's more towards the decumulation phase of your portfolio as opposed to the accumulation phase.

Peter Higgins 43:40

Brilliant. I love that reply. Thank you very much. Now I'm conscious of the time, I want to conclude our conversation Edmund with first of all, giving you the opportunity to talk about your book, The Idle Investor Book that you wrote a while back, and also about the fact that you're trying to educate your clients as well, which is what we're trying to do at the Investing Matters Podcast regarding your own podcast that you put out on a frequent basis to BNP Paribas with your colleagues there. So what did you just share some of that with us, please?

Edmund Shing 44:06

Of course, so well, on the book, it's very simple. I wanted to write a book. This is a few years ago, now I wanted to write a book that basically address the needs of the average investor, who didn't want to spend a lot of time and digging into the individual stocks.

So basically, I proposed the book three automatic, as it were investing systems that don't take more than 15 minutes a month to put into practice based largely on ETFs. So very easy to implement. You don't need to be buying lots and lots of things. And basically, it's a rules, three rules based systems.

Very simple, very straightforward using ETFs. And which when you back test them over a long period of time, do fairly well. I mean, they're not I wouldn't say they blow the lights out, but they do pretty well.

They do better than just buying a sort of all worlds ETF and then doing nothing else. So that's the book.

So please have a look on Amazon. I'm sure it's still there somewhere. Feel free on the education side. Yes, we absolutely. We produce a weekly podcast and I do use that as part of this educational push.

So we try, obviously to respond to, to some degree questions our clients have at any particular time. So obviously at the moment, it's all about volatility, crisis, investing, defensive investing.

So we focus on, but every week, and the key here is I tried to keep it simple and short. So simple as in, we don't try to go into too much jargon, because I do find there's a lot of jargon get in the financial markets, the risk is always there's too much financial jargon, and you leave behind the average investor has no clue what you're talking about.

So we try to avoid that and keep it simple. Secondly, shorts, because you know, these days, people don't have long attention span, we're all very busy people. So we try to keep it to 10 minutes or under. And I think that's a nice little bite size. It's long enough to get a point across, we're not too long as you bore the pants off people. And so we try to attack off often an educational topic or theme in the news, and then give our take on that. But more importantly, what implications what conclusions should investors be drawing at the end of the day?

Peter Higgins 45:59

Now I've what I've watched several of them and they're always very, very good. But I was, what I like about is that you're almost so relaxed, you're like yes, Charlotte, yes, whatever did it. So it's not a case of I'm coming and I'm speaking I'm going to extol upon you what what you should be doing. It's very, very relaxed. And I like that level of humility when you actually talk about it.

Edmund Shing 46:16

Well, it's funny when you talk about I of course, I in turn listen to your Twin Pete’s Podcast, as well as the London South East Podcast. Exactly. You've got that. In fact, I noticed sometimes you have to keep Pete on a bit of a leash because he is often I find that I know. I know. Everyone finds that particularly amusing.

Peter Higgins 46:33

Thank you very much. It's been an absolute pleasure speaking with you Edmund again, and I'm looking forward to when you’re based back in the UK, I'm looking forward to when I can come down and meet up with you and share it sharing with you.

Edmund Shing 46:44

Absolutely. Well, I'm looking forward to it. So hopefully one of these events like the Mello event coming up with physical events and once again, we'll be able to see each other once again. Absolutely. Thanks a lot for your time, Peter.

Peter Higgins 46:53

Brilliant. Thank you ever so much. That was Edmund Shing, the global chief investment officer of BNP Paribas Wealth Management Thank you ever so much again Edmund. Take care God bless good luck to the family.

LSE 47:14

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